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CRO shares drop after Pfizer AstraZeneca merger rumours

By Fiona BARRY , 29-Apr-2014

The recent rumours of mega-mergers are behind a sudden drop in the share value of contract research organisations (CROs) but should bring long-term benefits, says an analyst.

Caution about unknown risks if several high-profile pharmaceutical mergers and acquisitions go ahead have caused a 3-7% decline in CRO shares, said David Windley, equity analyst, Jefferies.

Pfizer confirmed yesterday it approached AstraZeneca in January and again three days ago to propose a merger, although AstraZeneca has declined the offers. The news came several days after GSK sold its oncology pipeline to Novartis and acquired Novartis’s vaccines division.

Taken with rumours reported by Reuters that Merck & Co. is set to sell its consumer health business, the prospect of major upheavals has caused unrest in the industry. Icon’s shares dropped 7.4% on when markets opened on Monday, while Parexel fell by 6.9%, and both Quintiles and Covance by nearly 4%.

‘Severe’ response reflects risks

While the share sell-off was “overly severe,” said Windley, it “rightly reflects the risk to CROs of work disruptions during large client mergers.” Planning and executing the integration of new divisions can lead to project delays or the abandonment of planned work, he said.

However, over time the prospects of big pharmaceutical mergers can be good for CROs, he said.

In the long-term, the merged clients tend to outsource more, though getting to the ‘long-term’ can take a year. CROs with exposure to the seller (or to both) typically see their wallet-share cut.

On the positive side, the creation of ever larger ‘big pharmas’ virtually ensures their work with only the top five to seven global CROs.

Pfizer’s third vendor

Whether or not Pfizer eventually buys AstraZeneca, its search continues for a third strategic partnership after Parexel and Icon, said Windley.

The decision had been delayed once more, he said, “purportedly sent back to triple-check after being presented to senior management.

The timing of the postponement, “while Pfizer management was also pursuing AstraZeneca, might not be a coincidence,” he continued. “The third [partnership] is supposed to be awarded ‘by the end of April,’ but we wouldn't be surprised by another delay.

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